Is Evelo Biosciences (NASDAQ:EVLO) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Evelo Biosciences, Inc. (NASDAQ:EVLO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Evelo Biosciences

What Is Evelo Biosciences's Debt?

As you can see below, Evelo Biosciences had US$46.7m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$92.0m in cash offsetting this, leading to net cash of US$45.3m.

A Look At Evelo Biosciences' Liabilities

Zooming in on the latest balance sheet data, we can see that Evelo Biosciences had liabilities of US$21.4m due within 12 months and liabilities of US$54.8m due beyond that. Offsetting this, it had US$92.0m in cash and US$7.50m in receivables that were due within 12 months. So it can boast US$23.3m more liquid assets than total liabilities.

This surplus suggests that Evelo Biosciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Evelo Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Evelo Biosciences can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, Evelo Biosciences shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Evelo Biosciences?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Evelo Biosciences had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$111m and booked a US$123m accounting loss. Given it only has net cash of US$45.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Evelo Biosciences is showing 5 warning signs in our investment analysis , and 4 of those are a bit concerning...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.